Does it pay to be a Roommate or Mortgage Owner?

Things I wished to have known before I got a house.  When I started my first job after university all I dreamed about was being a homeowner.  I was sick of the flea bag apartments that I rented in College.  I spent my nights watching home remodeling and flipping shows.  I was salivating at the thoughts of transforming a home into a dream home.  Seriously, how hard can it be – the TV shows does it in 22 minutes, and I have a degree in engineering.   So basically, I was a naïve graduate.

One day at work, I had the opportunity (maybe I should rethink that term) to meet with a broker and real estate agent after they had presented on the topic of home owning as an investment.  Does it bug you that broker is the word “broke” + “er”, and I know the combination with “large” + “er”, implies more?  Basically I become more broke (“broker”) after the meeting.   

They recommended all these crazy ideas, “no down payment”, “interest only”, etc.    Then they approved this boy who has only worked a few months in his life for a 450K loan, “Houston we have a problem”.   Well luckily I was not 100% fool, as I ended up around half of the max approved loan with a 30 year industry standard loan – because I recognized that “interest only” loans sound a lot like a rest of life rent agreement with the option to own. 

So here are some thoughts I wish I had prior to my broke decision,

1.       Cheap rent and maximize savings – here is a true scenario, my friend/colleague rents a room for around $450 a month.  If I had signed up for that for 3 years, I could have saved at least $100K in the bank, assuming a take home (after taxes) of 55K a year.   I would have spent only $5400 on rent per year.  It pays to be a roommate.

2.       Look at the amortization table for a mortgage and realize that the first several years are interest only.  The home payments (principal and interest) is roughly 1700 for a 260K loan at 6.75% (I was told the rates were going to hit 12%, what would you do – BUY?).  Basically this house will be paid off in 30 years at 20,400 a year in payments.  So the real purchasing cost of this home is, 20400 * 30 = 612K.  WHAT A DEAL!

a.       So wait a second, what if I rented for 6 years and nearly bought outright? I would only had to finance 60K, and with my savings rate of 100K in 3 years, I would have the house paid for in 9 years.  Screw the 30 year loan, rent from a friend, share a space for a FEW years

In the 7 years of working and wasting money, I have realized if I had just watched some of these expenses I would have been so much wealthier and stress free.  I don’t plan to repeat any of these mistakes, and I plan to talk everyone years off who attempts to go where I have gone.  The next 7 years I will be WEALTHIER and HEALTHIER.